When is a B+ better than an A+?
February 13, 2012
by Brian Wolf

For as long as I can remember, all the way back to first grade, an A+ always beat a B+. This is just common knowledge.

From first grade all the way through college, we chase the elusive A+ status on our report cards. So, it’s only natural that when we get out into the real world, we are predisposed to think that an A+ is always the best.

It’s not only grades in school; think about foods. Would you rather eat a grade A steak or a grade B steak? Of course, just to be sure, we could throw in the number 1. Because anything that is an A1 must definitely be the best.

So now, let’s jump into the financial world. Hey, guess what? We have rating here also. No need to explain, we all know that we just need to find an A+ company and we will be just fine, right? So let’s do a quick search for the top rated insurance companies.

Wait a minute, this can’t be right . . . what do you mean A+ isn’t the best? You mean to tell me that there is an A++ category? Why, that’s brilliant! They skipped right over the obvious A1 classification and went straight into the A++ category.

But wait, there’s more; look further and you will see an AAA group. Now, I’m totally confused. A look at some top insurance companies’ ratings show these rating categories; A, A1, A+, AA-, AA, Aa3, AA+, A3, A2, Aa2, A++ and A-. Is it any wonder why people are confused with ratings?

I have to chuckle because for some reason, they missed out on the A- - rating. Maybe that’s because they thought a double negative was too confusing as opposed to a double positive.

I really don’t understand the need for this type of a rating system. Whatever happened to the good old ranking of 1 to 10, that seems to work pretty well in most applications in life? I can rank my satisfaction of a restaurant or a movie on this scale. It also works for ranking your significant other or spouse. When I met my wife, I ranked her a 10, and she ranked me a 1 . . . I guess opposites do attract.

OK, so what’s the deal with a B-rated insurance company? Are they just one bad investment away from bankruptcy? Not likely. You see, in the world of insurance companies, often-times a company can “buy” their ratings. They might be writing a check directly to the rating company, which is just a standard fee . . . wink, wink. Or, they might just take money from the left hand and give it to the right hand and, presto chango, we have a new and improved rating.

You see, basically all the rating agencies have different formulas to evaluate companies. Otherwise, why would you need more than one rating agency? I remember when AM Best was getting heavily criticized in the press for giving Mutual Benefit an A+ rating just before they fell into receivership. The bottom line here is that all rating agencies have a number of flaws in how they evaluate companies. So let’s just cut to the chase with some facts.

It’s widely reported that nobody in the history of America has ever lost any of their principal dollars due to an insurance company failure. Of course this certainly can’t be said for the banking world, but that’s a different subject alltogether.

The reason that people don’t lose any of their principal is because insurance companies are regulated extremely safely. They can’t invest your money in high risk investments. And if they fall on hard times, it’s because they invested poorly with their own money, not yours. So, when it comes time to pass out the money, there is enough for the policy holders. This is referred to as “solvency” and it’s the most important and maybe the only thing you need to look at.

When might a B++ company be safer than an A++ company? When their solvency exceeds that of the A++ company.

So remember, B’s can sometimes be better than A’s . . . I only wish I’d known this back in my school days.

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